None of these factors bode well for equipment makers like Joy and Caterpillar Inc. (NYSE:CAT), both of which acquired a China-based mining-equipment company each last year. If a paradigm shift toward cleaner fuels shrinks China’s coal market in the years to come, Joy could be hit hard because nearly 18% of its revenue comes from the market. Caterpillar currently gets just 3% revenue from China, but most of its growth plans revolve around the market.
Closer home, things look equally murky. Arch Coal Inc (NYSE:ACI) expects 35% of the coal units in the U.S. to shut down in the next five years. While that may sound like a bold projection, Arch’s forecasts can’t be taken too lightly since it controls nearly 15% of the total coal supply in America.
Simply put, there’s too much uncertainty regarding Joy’s primary markets, which bodes ill for the company and its investors.
So what should you do?
All’s not lost for Joy investors, though, because the company is prudently doing what it should in these challenging times: restructuring operations to trim costs. After saving $47 million in costs this fiscal year, Joy plans to shave off another $75 million from costs in 2014.
More importantly, Joy’s inventory level is easing, which is also why the company expects to generate about $500 million of cash from operations for the full year, as compared to $443 million in 2012. Adjusting for its projected capex of $150 million, Joy should have nearly $350 million as free cash by October when it ends its financial year. That’s a good jump from last year’s $200 million worth of free cash flow. A part of it will go into shareholders’ pockets in the form of buybacks. Greater dividends would be better any day, but buybacks also reflect management’s confidence in the business.
Foolish takeaway
That said, savings wouldn’t help until the top line grows. It could be too early to say that Joy’s stock has bottomed, given the company’s thinning order book and unfavorable market conditions. The stock is at its weakest, and any negative news out of China could send it lower.
While coal might quickly bounce back in the game, especially if natural gas prices strengthen, its future looks dark to me. Instead, I’d prefer going for a company like Caterpillar Inc. (NYSE:CAT), which doesn’t depend on mining alone. With the end markets looking murkier, Joy stock’s bearish trend, which began in 2011, could last longer than warranted.
The article Beware: The Ghosts of 2009 Are Revisiting This Stock originally appeared on Fool.com and is written by Neha Chamaria.
Fool contributor Neha Chamaria has no position in any stocks mentioned, and neither does The Motley Fool.
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